Oftentimes, organizations that work across borders will come to Clark Nuber with their federal return, only to discover there are a lot more foreign operations reporting requirements than they anticipated. This article will cover the commonly overlooked areas, and we’ll note what questions you should be asking if you have international operations. A quick reference guide for navigating the Form 990 for foreign operations can be found at the end of the article.
Number of Employees
The first commonly misunderstood section concerns the number of people employed by your not-for-profit. On Page 1 of the Form 990, Line 5, the number of employees is highlighted for readers. What is not made clear, until you flip to Page 5, is that this number is actually the number of U.S. employees as it’s derived from the U.S. Form W-3 filed each year.
We note this because, generally, an organization with foreign operations has employees abroad, and the total on Page 1 of the return does not reflect the total scope of the organization. Schedule F, Part I, Statement of Activities Outside the United States, does showcase this number, but sometimes not-for-profits want to add an additional disclosure to Schedule O explaining that this number doesn’t encompass everything, and there are more people employed by the organization worldwide.
Next, if you are generating any contribution income from foreign sources, there is a possibility it will be part of Form 990, Part VIII, Line 1, as well as reported on Schedule B, Schedule of Contributors. Foreign contributors bring up a few different questions and reporting requirements. First off, if they meet the requirements, they may need to be listed on Schedule B. Second, foreign donors always raise the question of any fundraising expenses incurred in obtaining those donors. These can be direct or indirect and can include things like grant application, travel expenses, etc.
It is often missed that these foreign fundraising expenses need to be listed on Schedule F, Part I. They can be built into the region’s overall expenses or called out on a separate line, but they should, at a minimum, be addressed on the return. If the fundraising is done all by volunteers, we recommend you still disclose the activity even if the associated expenditure is zero.
The next area you may run into foreign reporting would be for expense purposes. If the organization incurs expenses or grants abroad or pays any expenses or grants in the U.S. that are ultimately used or incurred abroad, there could be additional reporting requirements on the Form 990. Read that closely: “pays any expenses or grants in the U.S. that are ultimately used or incurred aboard.” That includes grants to U.S. organizations specifically for work or use abroad (relief efforts, special projects, etc.).
Generally, most organizations don’t realize that the Form 990 Schedule F instructions extend that broadly, but they do. So if you have any grants or expenses that are ultimately used, paid, or incurred abroad, you may have additional reporting requirements on Schedule F. This would also impact how grants are categorized on Form 990, Part IX, Line 1, 2, or 3 as foreign or domestic grants and may result in a grant moving from Schedule I, used for domestic grantmaking, to Schedule F.
Schedule F, Part I calls for a general listing of all expenses, including grants, incurred abroad by region, with a brief description of the purposes of those expenses. If you have foreign grants, additional detail on those is supplied in Schedule F, Part II and III as required. Do not list any grants on Schedule I of Form 990 that really belong on Schedule F because the funds were meant for, or used in, activities abroad. There is a level of professional judgment to exercise when deciding whether something is a foreign grant or not. It’s not necessary to track every single grant dollar, but if the funds were specifically designated for a foreign purpose, it’s generally advisable to call them foreign grants.
Schedule R is the final area of the Form 990 where you may need to report foreign operations. This point will stay pretty broad in nature as it relates to the underlying structure of any foreign offices the organization may operate. For example, let’s say a U.S.-based charity runs a school in Africa. To operate that school, the foreign country required they create a legal entity in the country. All of the funding, management, and oversight came from the U.S. charity, but there is a separate entity within Africa executing the day-to-day operations of the school. Depending on how that entity is set up in the foreign country, there may be a control relationship that needs to be reported on Schedule R. In addition, there could be a separate foreign entity filing due in the U.S. for that foreign entity if it is structured a certain way (the U.S. entity controls the foreign entity by vote or value).
Alternatively, we see several larger organizations with operations all over the world that are not required by local law to create a separate legal entity in those countries. Instead, they operate under the name and registration of the main U.S. charity. Often, the foreign office is considered a foreign branch for U.S. reporting purposes. In this case, there is likely no reporting requirement on Schedule R as they are not a separate legal entity but a part of the U.S. operations. However, there may still be further U.S. reporting requirements for the branch itself. The organization, along with your legal counsel and your tax practitioner, should review the legal structure to agree on and determine if any foreign compliance filings may be needed. The answer to these questions feed directly into what related entities need to be disclosed on Schedule R, as well as how you would answer the questions on Schedule F, Part IV each year.
Foreign Bank Accounts and Boycott Reporting
Two additional foreign compliance requirements can come out of international operations, and they relate to foreign bank accounts and boycott reporting. More often than not, if a U.S. public charity has activities in a foreign country, even if they are just a branch or office and not a full-fledged separate foreign entity, a foreign bank account is required to manage cash flow and daily operations. Most countries are difficult to operate in without a local account, so any foreign operations is usually a tip-off that the foreign bank account reporting requirements should be evaluated. FinCEN 114 is the form used to report that information.
Secondly, if any of the not-for-profit’s operations are within the predefined boycott countries, an additional disclosure form is required annually. Form 5713 would be the form used to report the necessary information. The list of boycott countries is updated periodically and should be reviewed annually.
It is possible that a not-for-profit invests into a foreign hedge or equity fund within its portfolio. Or they may invest in a U.S. fund that has underlying foreign investments. Therefore, it’s important to understand the structure of any alternative investment funds the organization might be invested in as there may be additional foreign compliance filings associated with those investments.
We hope this summary of the impacts of foreign operations on the Form 990 and other tax reporting was helpful. Should you have any questions, please contact a Clark Nuber international tax expert.
Quick Reference Guide for Navigating the Form 990 for Foreign Operations, Grantmaking, and Fundraising
|Form and Section||About||Pro Tip|
|Core Form 990, Part I, Line 5 and Part V, Line 2a||Reflects the U.S. employees of the organization.||Use Schedule O to include an explanation of the total employees for the organization.|
|Core Form 990, Part V, Line 4||Inquires if the organization has an interest in, or signature authority over, any foreign bank accounts.||The Form 114, FBAR, filing is also required for U.S. employees and officers (if they have signature authority over the foreign accounts) and for foreign organizations the not-for-profit controls.|
|Form 990, Schedule F||Reflects the international activities and grantmaking of the organization.||Don’t forget to indicate the foreign fundraising activities (even if it is the activity is done through volunteers) in Part I.|
|Form 990, Schedule F, Part IV||Includes a helpful list of other foreign filings to include with the Form 990 or Form 990-T. Including Form 8621, Form 5713, Form 8858, and Form 8992.|
|Form 8621||This form is no longer applicable to exempt organizations unless the passive foreign investment corporation is subject to unrelated business income.|
|Form 5713||This form will need to be filed with a Form 990-T (even if it is blank).|
|Form 8858||This form is not included on Part IV of Schedule F; however it still may be applicable to the organization if it has a foreign branch or foreign disregarded entity.|
|Form 8992||The 2017 Tax Act created a new revenue stream to U.S. taxpayers called global intangible low-tax income or GILTI. This form may be required along with the Form 5471.|
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